- September 2014
- Posted By Ninoslav
- 0 Comments
While talking about forward exchange rate, you need to know the meaning of it. It is the rate where commercial bank takes initiative to exchange one currency for another at a specific date in future. The exchange rate is known to be the type of forward price.
But, why it is so very important? It is a kind of rate that is initially negotiated between bank and client who actually enters into forward contract where they agree to sell or buy some foreign currency in future. Most of financial institutions or multinational corporations make use of forward market to enclose future payable or receivables.
Importance of the forward exchange rate
It is similar to that of swap, where fictional amount is not being exchanged, but the forward exchange rate agreement actually differ with floating rate as well as fixed rate that is paid on which is known to be an effective date.
There are different types of exchange rates found in market. You need to be aware of every type before playing into currency market. Forward exchange rate is applicable to transaction which can occur at a specific period of time in future. Though the value is fixed based on present market, but settlement is done in the future at specified date.
The future rate is the type that applies to future delivery of currency which is known to be future rate. The contract is done in the present time, but the payment needs to be done on fixed date that is in the future with rate value of particular day.
Hedging along with the forward contract is usually done for larger transactions, but the futures contracts are mainly used to do smaller transactions. It is not enough to know about foreign exchange rate; rather you should also gain knowledge on “How to make money through Futures Exchange?”